I want to purchase two flats each for my son and daughter out of this amount. Please advise me about my tax liabilities and how to save tax to the maximum extent.
The applicability of capital gains would depend on whether the agricultural land is situated in a rural area or not, as notified in the tax laws.
A rural area is classified as an area which is not located within eight km from the local limits of any municipality, corporation or cantonment board or which does not have a population of more than 10,000 as on the first day of the previous year as per the latest census report.
An agricultural land situated in rural areas will not be considered as a “capital asset” as per Section 2(14) of the Income Tax Act and hence will not attract capital gains tax.
On the other hand, if the land is situated in other than the specified rural areas, it would attract the provisions of capital gains. Depending on the location of your land, it could attract capital gains tax.
Further, if you have held it for more than 36 months it would qualify as a long-term capital asset.
Hence, you can get the indexation benefit, that is, compute the present value of the cost of acquisition of the land using prescribed cost inflation indices and reduce this cost from the sale value to determine the capital gains.
You could also get exemption under Section 54F for the capital gains arising on the sale of the agricultural land if the entire sale proceeds are used to purchase one residential property either a year before selling the land or two years after the date of sale or for constructing one residential property within three years from the date of transfer.
Based on the above, it may be possible to claim exemption only for one flat. The unutilised sale consideration has to be deposited in the Capital Gains Account Scheme within the due date for filing the return for 2015-16 (that is, before July 31, 2016) but can be withdrawn when required for acquisition/construction of the new asset.
Additionally, you could invest up to ₹50 lakh in notified bonds (within six months from the date of sale of the land) and get exemption under Section 54EC.
Exemption under Section 54F could be claimed even if the flats are purchased in your son and daughter’s names.
In this regard, reliance can be placed on the ruling of the Delhi High Court in the case of CIT vs Shri Kamal Wahal (ITA 4/2013) wherein it was held that for the purposes of Section 54F, the new residential house need not be purchased by the assessee in his own name nor is it necessary that it should be purchased exclusively in his name.
The Court observed that the assessee had not purchased the new house in the name of a stranger or somebody who is unconnected with him and that he has purchased it only in the name of his wife. There are also other rulings on similar lines.